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The debate surrounding the financial reporting measurement approach known as fair value was already in full swing by the time the recent economic crisis hit. That event only served to add fuel to the fire, as some critics charged that fair value measures of heavily discounted assets during an exceptional period of distress sales actually made the situation worse. The author questions this analysis. Far from being the culprit, she argues, fair value is a rather robust measurement approach, that embodies several core principles underpinning the accounting framework. As well as highlighting the relative merits of fair value, the author responds to the chief concerns put forward by the critics, showing that whether one holds up estimation error, holding gains and losses, earnings volatility, stewardship or diligence, fair value proves its worth. In many cases, the old favorite of historical cost-based measures leaves much to be desired. Until the International Accounting Standards Board (IASB) and the United States Financial Accounting Standards Board (FASB) finalize their joint conceptual framework project, this article helps clarify some of the contentious issues that continue to dog the profession. Rather than battling against it, accounting experts would be better off devoting their energies to making sure that fair value is used in the most effective way possible.

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Since 1999, Procter & Gamble (P&G) had reported restructuring charges each quarter for Organization 2005, a five-year comprehensive corporate restructuring program. In 1995, the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) issued a consensus opinion (EITF-94-3) that defined when certain restructuring costs could be recognized as a liability and specified increased financial statement disclosures. Yet, like other areas of accounting, there was considerable discretion in when and how a company could charge restructuring costs to earnings. In December 2001, P&G was halfway through Organization 2005. Should P&G management forecast the remaining costs of the program with enough detail to recognize a liability in FY 2002 for the balance of Organization 2005 charges? Or should it continue to recognize the remaining costs of the program each quarter as the program progressed? How should management exercise its discretion, and how should it explain the charges to investors?

learning objective:

To illustrate how restructuring charges are accounted for under U.S. generally accepted accounting principles; to discuss the discretion maintained by companies in determining when and how a company can charge restructuring costs to earnings; and to contrast current practice to financial reporting for corporate restructurings before the issuance of EITF 94-3.

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Highlights the impact of JDS Uniphase's acquisition program on its financial statements, focusing on goodwill assets and amortization. In 2001, the company wrote off $51 billion in goodwill assets, the largest write-off in history. Discusses the company's write-off of goodwill in the context of accounting standards, as well as investors' reaction to the write-off.

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In 1997, WorldCom's CEO bid successfully to acquire MCI Communications. The key questions that remained to be settled were how to structure the deal for tax purposes and what impact the acquisition would have on the combined company's reported earnings. The CEO knew that the tax and accounting structure of the MCI acquisition could have serious implications for the combined company's future financial performance. He also knew that the composition of his offer (80% cash, 20% stock) for MCI would impact both. Under WorldCom's 80% cash offer, purchase accounting was the only financial reporting option. Under purchase accounting, the target's net assets were recorded at their fair value, and the unallocated purchase price was assigned to goodwill. However, the amount of goodwill created in a transaction depended on the tax structure of the acquisition. The creation of a new liability on the target's books reduced its net asset value, thereby resulting in more goodwill. This case analyzes and illustrates by example how the transaction's tax structure can affect both the tax implications of and the financial recording for an acquisition. The amount of tax paid, liabilities assumed, the tax implications of and the financial recording for an acquisition. The amount of tax paid, liabilities assumed, and goodwill recognized all depend on the transaction's tax structure.

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Explores the issues of accounting for in-process research and development (IPRD) for an acquisition under purchase-method accounting. Provides information on acquisition accounting and the standards used for defining and treating IPRD. Also discusses practices that led to controversy over IPRD accounting in the mid-1990s. The situation is the acquisition of a small software company (Mirabilis) with a very popular Internet software product for instant messaging, but with no revenues. The acquiring company, America Online, indicated in the acquisition announcement that it intended to write off a substantial amount of the purchase price as IPRD. Shortly after that announcement, the new chief accountant of the SEC indicated that the SEC was concerned about the amount of such write-offs. Asks how the CFO of AOL should respond and what the impact of the IPRD write-off amount will be on the company's future earnings and stock price.

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In the spring of 1999, Marta Fontanez, a new analyst with Capital Appreciation, needed to make a recommendation to the investment council concerning the value of Microsoft's stock. She was concerned with announcements the company made between 1997 and 1999. In the quarter ended June 30, 1997, Microsoft announced that it did not buy back any shares because its stock "price was a little too high." Not only did Microsoft's stock price fall on the news, but the Dow Jones swooned 130 points. In subsequent corporate releases, Microsoft's Steve Ballmer repeatedly cautioned investors of the risks inherent in Microsoft stock and the possibility that the security was overvalued in 1998 and 1999. Microsoft was publicly talking down its stock, purchasing fewer shares in the open market than before, and experiencing heavy levels of insider selling. Fontanez was also concerned with the value of the firm, given the effects of options issuance, and wondered whether the market was not accurately calculating their costs. She needed to determine whether these actions reflected Microsoft insiders' superior information regarding the value of the firm--and, thus, there would be an eventual correction in the stock price--or whether the stock price would continue to climb. Fontanez wondered whether Ballmer was correct that Microsoft had become simply too expensive to buy. Was Microsoft finally at a loss as to how to invest its profits? Or, was the stock a good buy?

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An equity research analyst is trying to decide how to analyze Silicon Graphics' financial performance. The company reports net income but discloses that it would have had a net loss if its employee stock option-based compensation had been recognized as an expense in the income statement. This case deals with whether and how to measure stock-based employee compensation and its effects on financial performance and investor perceptions of firm value.

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AOL investor Fred Grant was surprised and disappointed by the January 10, 2000 announcement of the AOL Time Warner merger. He had been fortunate enough to buy AOL at $40 in October 1999, just prior to the stock's rapid rise to $95 in mid-December. Although just days prior to the merger announcement the stock had settled to $73, by February 2, 2000, it had suffered another decline--to $57 per share. Although many observers spoke in glowing terms of the enormous synergies between Time Warner's premier content, advertising, and cable distribution channels and AOL's Internet brand, marketing savvy, and subscriber base, analysts predicted that growth for the merged company would be in the 15%-20% range, one-half of what Grant expected for his AOL holdings. Analysts also warned of the management and execution risks associated with the enormous and unprecedented combination of Internet and traditional media businesses. Finally, Grant was concerned about the implications of AOL Time Warner's use of the purchase rather than pooling method to account for the deal. Why wouldn't the company use pooling accounting, as had other companies for large stock deals such as NationsBank-BankAmerica and Travelers-Citicorp? Would goodwill's dampening effect on earnings hurt the market valuation of the new company? As Grant watched his AOL stock slide in the days following the merger announcement, he wondered whether he should sell his shares or, as some analysts suggested, use these new lows as a buying opportunity.

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